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For reports relating to the SEC's review of proxy voting and related communication issues addressed in the Chairman's speech below, see


U.S. Securities and Exchange Commission, October 19, 2010 speech


U.S. Securities & Exchange Commission
SEC Seal
U.S. Securities and Exchange Commission


Speech by SEC Chairman:
Remarks at the NACD Annual Corporate Governance Conference


Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

Washington, D.C.
October 19, 2010

Thank you, Barbara, [Franklin, former Secretary of Commerce and current NACD Chair] for that kind introduction.

It is a pleasure to be here with you today, at a moment when so much about what you do — and what I do — is being fundamentally transformed. I have some idea of the challenges you face — as I am in the trenches on many of the same issues you’re grappling with, trying to ensure that the SEC meets Congressional mandates and investor needs effectively, but also with minimal regulatory burden.

And so I know that — as individuals who sit at the intersection of shareholders and management in an increasingly complicated economic era — your responsibilities as corporate directors are growing at a dramatic rate. And honestly, the expectations for how corporate governance can fortify our economic system — through vigilance, risk management and transparency — have never been higher.

Shareholders expect you not only to know your business — how to control risk, market, compete, profit and grow in an increasingly global marketplace — but, in many cases, to know about and effectively oversee the impact that your businesses may have on the financial system.

At the same time, much of the regulatory framework within which your businesses operate is also changing. As SEC Chairman, I recognize that many of our new rules, and the rules that we will be adopting over the next two years, will profoundly impact both how your boards fulfill their responsibilities, and how you communicate those activities to your shareholders.

In a moment, I’ll give you an overview of the new rules that I expect the Commission will consider as we move forward on the agenda that Congress has created through the passage of the Dodd-Frank Act.

Before I do that, though, I’d like to explain the Commission’s role regarding directors and corporate governance.

First, our responsibility is to ensure that our own rules support and do not interfere with governance characteristics that market participants — or, in some cases, Congress — have identified as significant.

When consensus has been reached that certain features are relevant to effective governance, then our rules regulating disclosure and the proxy process should ensure that this information is provided. How that information is interpreted and acted upon is up to board members and to the shareholders who elect them.

Second, when it comes to the securities markets, we are the guardians of honest disclosure. Companies and boards must tell their shareholders, current and prospective, the truth — and the whole truth — about those matters which are important to investment decision-making, including governance.

With this in mind, let me now outline for you some of the specific projects that are on our agenda.

Making Engagement a Priority

Speaking both as a regulator and as a former board member, I believe that it is vital that shareholders and board members move beyond the minimum required communications and become truly engaged in the shared pursuit of high quality governance.

For boards and their companies, engagement means more than just disclosure. It means clear conversations with investors about how the company is governed — and why and how decisions are made.

But engagement is a two-way street. As the report of the NACD’s Blue Ribbon Commission on Board-Shareholder Communications points out, boards can also benefit from access to the ideas and the concerns investors may have. Good communications can build credibility with shareholders and potentially enhance corporate strategies.

Over the past 20 months, we have taken several steps that we believe support more effective communication between shareholders and boards. But we have a lot more work ahead of us.

The rulemakings required by Dodd-Frank will significantly increase disclosure requirements. And, looking further ahead, we are still receiving comments on our proxy plumbing concept release, a key component of which is a review of the current limitations on company-shareholder communications.

But let me add here that we’re not just interested in communications between boards and investors. As we move to consider Dodd-Frank requirements and public comments on our proxy plumbing release, we would like to engage with you, as well. Your voices will help ensure that the right balance is struck between the goal of increased disclosure and the burdens new rules might present. We look forward to hearing from you.

Increasing Disclosure Regarding Directors and Nominees

Last year, the SEC took one step that I believe has great potential to improve communications concerning a very important point — that is, why a company’s board members are the right people for their positions.

We adopted new regulations that, for the first time, required describing what in the director’s background and skill-set led the board to select that individual. In the past, all that was presented in proxies about director candidates was a very brief biography that did little to communicate important information regarding the unique or significant value candidates might add to a particular company’s board.

In just their first year, these rules resulted — with some exceptions — in proxy statements that were more informative. They gave investors greater insight into the qualifications of board candidates, and a better understanding of how candidates’ skills and experience suited the needs of their companies.

In one example, the proxy tells investors that “Ms. Gray”— of course, not her real name —“has spent her career in consumer businesses and brings key financial and operations experience to the Company….[she] possesses broad expertise in strategic planning, branding and marketing, business development, retail goods and, sales and distribution on a global scale. Ms. Gray’s positions as chief financial officer and her service on the audit committees of other companies…also impart significant expertise to the Board…Through her most recent experience… including with on-line selling, Ms. Gray provides the Company with valuable insight and guidance.”

Contrast that with another example — again, changed slightly from the original filing. In this one, each candidate presents only the same bare-bones biography that has been required for decades. Then, the proxy merely adds a sentence at the end of the section which essentially says: “our directors each have integrity, sound business judgment and honesty, which are important characteristics of a good board member.”

Now, we have been told that some board members were advised that they should keep the new information to a minimum. I disagree. I think filings like the second one I mentioned increase the distance between boards and shareholders, to the detriment of both. I urge board members to engage with those who draft the proxy statements to make sure that this disclosure accomplishes its goal of better communicating this key information to shareholders.

In that same rulemaking project, we also adopted new disclosure requirements addressing other key concerns of shareholders. We required companies to disclose why they selected a particular board leadership structure.

Why do they have a combined CEO and Chair? Or why have they separated them? We didn’t take sides on this issue; that’s not our role. But questioning a board’s structure is the shareholders’ role, so we wanted boards to give shareholders clear and accurate answers.

We required detailed information about compensation consultant fees when the consultant does other work for the company. We did this to address concerns that compensation committees might be receiving advice about management compensation from consultants who are beholden to management for other business.

It is important that shareholders have that information when considering the board’s compensation decisions. The Dodd-Frank Act amplifies this requirement, with consideration of other potential conflicts. So these disclosures will be changing further as we implement new provisions through our upcoming rulemakings.

In light of heightened concerns about how boards address risk, we also added a new requirement, that boards explain how they oversee risk at the company. Some companies simply recited lines like “risk is overseen by the board as a whole.”

Not all that helpful, I would say. Meanwhile, other companies provided detailed disclosures of their boards’ and executives’ risk-related responsibilities and functions. I believe investors feel better informed and reassured by these more detailed disclosures.

Further, since misaligned or poorly-calibrated incentive compensation programs were widely believed to have promoted inappropriate risk-taking that contributed to the financial crisis, we added a requirement that companies assess whether their compensation programs expose them to material risks.

This requirement applies to compensation throughout the company — not just the executive ranks — and to companies in all industries, not just financial firms. I think it is vital that boards understand how compensation practices affect risk-taking, and this new requirement brought that issue front and center for boards.

For financial services firms, Dodd-Frank takes this issue further, and requires financial regulators to adopt regulations or guidelines that prohibit incentive-based compensation arrangements that encourage inappropriate risk-taking. We are working with our fellow regulators in developing these new standards.

Dodd-Frank and Executive Compensation

Among of the highest-profile governance rulemakings now before us are the ones required by Dodd-Frank which concern executive compensation.

Dodd-Frank will require advisory say-on-pay votes at all companies at least once every three years starting at meetings on or after January 21, 2011. Shareholders will also vote on how often they would like to have the say-on-pay vote, and will have a similar “say” on golden parachutes.

Yesterday we proposed rules on these requirements. And, when you get a chance to read about them, I hope you will agree that the proposals are crafted to thoughtfully implement the requirements of the new law in a cost-effective way.

Dodd-Frank also required exchanges to amend their rules governing circumstances in which brokers vote proxies without instruction from beneficial holders, to prohibit voting on compensation matters, such as the say-on-pay votes. The New York Stock Exchange has already implemented this new mandate, putting it in place for the first round of mandatory say-on-pay votes starting in January.

The next proposal that you will see in this area will be the rules requiring that stock exchanges mandate new standards of independence for compensation committees at listed companies. That rulemaking will also address the conflict of interest factors that boards must consider when retaining compensation consultants.

Because this new disclosure will apply for all shareholder meetings taking place on or after July 21, 2011, we are aiming to get a proposal out by the end of this calendar year.

One of the more widely-publicized provisions of Dodd-Frank will require companies to calculate and disclose the median total compensation of all employees, and the ratio of CEO compensation to that figure, in accordance with rules that govern disclosure of executive compensation.

I understand that there are significant concerns about the potential difficulty of performing that median employee calculation. We will be proposing rules to implement this requirement next summer, so there is time for us to learn of your views and consider them in our rulemaking.

Next summer we will also issue proposals to require disclosure of the relationship between senior executives’ compensation and the company’s financial performance, as well as whether employees or directors are permitted to hedge against a decrease in value of company securities granted as part of their compensation.

In addition, next summer we will be proposing new standards under which listed companies will be required to develop “clawback” policies for reclaiming incentive-based compensation from current and former executive officers after a material financial restatement.

As you know, SEC rules already require a robust discussion of compensation decisions in the annual proxy statement Compensation Discussion and Analysis. But, with these new requirements — particularly the say-on-pay votes, coupled with new NYSE rules prohibiting brokers from voting uninstructed shares — it will be particularly important for boards to communicate the reasons for their compensation decisions effectively to shareholders.

Director-SEC Engagement

The Dodd-Frank regulatory timeline is short. But, we are eager to engage with you as the rulemaking process goes forward. Just as we are creating a regulatory structure that supports board-shareholder engagement, we have created an infrastructure that supports communication between yourselves and the SEC.

We have established a series of e-mail boxes on the SEC website to which comments can be addressed even before rules are proposed and formal comment periods begin.

In addition, SEC staff have been instructed to make every effort possible to accept requests for face-to-face meetings and, where appropriate, to seek out meetings with those affected by our proposals. Just as the written comments we receive will be posted on line, we will post memoranda detailing meeting participants, an agenda provided by persons meeting with staff, and any materials distributed at the meeting.

One group that is directly affected by these rulemakings, but which we have not heard from directly, is you, the directors who will be charged with complying with many of these regulations.

Voting Infrastructure

The SEC is in the early stages of another important proxy initiative, as well. Formally, it’s called our “voting infrastructure” project. Informally, we refer to it as “proxy plumbing” — an apt term for the complicated and sometimes creaky system through which information and votes flow during proxy season.

Every year, over 600 billion shares are voted at more than 13,000 shareholder meetings. Yet it has been 30 years since the Commission has conducted a thorough review of this infrastructure and, in light of the vast changes in the intervening years, we believe that it was time for a re-examination.

Earlier this year, we issued a concept release meant to start a comprehensive discussion about the state of proxy infrastructure and how it might be improved. We wanted to hear whether the current plumbing arrangement enhances the ability of boards and shareholders to engage with one another by supporting two-way communications that are seen as timely and accurate. Or, instead, does it inhibit engagement, by interposing barriers and inefficiencies between the various parties?

I would like to touch on some highlights, grouped under three headings: the accuracy and transparency of the voting process; the manner in which shareholders and corporations communicate; and the relationship between voting power and economic interest.


Voting, of course, is the main point of the proxy process. And so, we’re looking at several different areas. We’re interested in knowing the extent to which there is under- and over-voting of shares. We’d like to find a reasonable way to confirm votes, and to know if this is an issue for companies, as well.

Do parties who have lent shares need earlier information about the content of upcoming shareholders’ meetings so that they can decide whether to recall their shares in order to vote them? And would getting such information change their behavior?

We’re also extremely interested in whether and how we can facilitate greater participation by retail investors in proxy voting.

In addition, we’re asking whether data-tagging proxy-related data — such as information relating to executive compensation — would enhance shareholders’ ability to make informed decisions when they do vote.

And, finally, we believe that it is important that the right to vote be tightly tied to the outcome of that vote. As so, we’ve asked if the phenomenon of “empty voting” is widespread and damaging enough to warrant a regulatory response.

Our bottom line is simple — we’d like to move towards a more accurate and inclusive voting structure.


Our second concern is ongoing communication between the board and the shareholders. Most importantly, does the OBO/NOBO system balance the competing interests of investor privacy and effective communications appropriately? Or does it erect unnecessary barriers between you and the shareholders you represent?

And we’d like to know your opinion on proxy distribution. Are fees reasonable? And, do you see a way to bring greater competition — and possibly lower price and better service -- to the industry?

Proxy Advisory Firms

Finally, we’ll be examining the role of proxy advisory firms. Both companies and investors have raised concerns that proxy advisory firms may be subject to undisclosed conflicts of interest. In addition, they may fail to conduct adequate research, or may base recommendations on erroneous or incomplete facts. We intend to fully explore these issues.

We are very interested in discovering if there are reasonable steps we can and should take to make your communications with shareholders less cumbersome and more useful to you, and to them.


Technology, investor attitudes and the way financial markets work have all changed dramatically during the past decade. The way in which we, and in which you and your shareholders communicate, must similarly change.

The SEC cannot and is not interested in determining the communications strategies of individual companies. But we are interested in breaking down barriers that may prevent effective engagement, and affect investor confidence and, ultimately, financial performance.

The decisions we will be making in the months ahead are decisions that demand your attention and input.

Directors, who will be affected by these decisions, and who can bring important insights to the issues that we examine have a great deal to contribute. And, as the SEC works to encourage engagement between shareholders and boards, we want very much to engage with you, as well.

Modified: 10/19/2010





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